Top Five Reasons to Reconsider Arbitration

Date: 2/3/12

Virtually every business has entered into a contract that contains an arbitration provision, such as a vendor contract, a supplier agreement, or consumer sales contract. We have all been told that arbitration has numerous benefits – it is supposedly cheaper, faster, private, and more flexible than traditional litigation, and can eliminate the risk of a runaway jury or large punitive verdict. While alternative dispute resolution provisions have become increasingly common in recent years, many attorneys are reconsidering whether a traditional litigation path would better meet their clients’ needs. Although no dispute resolution process is perfect (or perfect in every scenario), the following statements represent some of the common criticisms of arbitration that have been advanced by practitioners on both sides of the bar:

1. Arbitration is Not Any Cheaper.While litigation can be quite expensive, practitioners and clients often forget that many of the day-to-day litigation expenses are absorbed by taxpayers. Filing fees are relatively modest in most state and federal courts, judges and juries are paid out of public funds, and the local courthouse provides a rent-free forum in which to resolve your disputes. In an arbitration setting, however, everything is paid for by the litigants. Most clients will find that experienced arbitrators will charge hourly rates that are comparable to those of the most experienced attorneys in the region, and that the arbitrator will typically require an upfront deposit as well as periodic payments for their work on the matter. Thus, a client is often faced with paying two sets of lawyers – the advocate they retained plus a percentage of the arbitrator’s fees.

In addition, most arbitrations are administered through an administrative clearinghouse which typically charges significant fees depending upon the amount in dispute. While there are usually a variety of fee structures available, most clearinghouses require that a percentage of the fee be paid before the case is allowed to proceed to the merits. Litigants may also find that one or more parties may be unwilling to appear at an adversary’s offices for hearings or testimony, which may require the parties to incur the additional costs of renting a neutral forum.

2. Arbitration is Not Any Faster.Arbitration was originally thought to be a fast process, which provided a stream-lined alternative to traditional litigation. However, many clients are surprised by the initial delays that are incurred during the process of selecting and retaining the arbitrator. Most clearinghouses present the parties with a list of potential arbitrators who are ranked and excluded by the litigants over the course of several days or weeks. Once an arbitrator is settled upon, that individual will typically be required to make additional disclosures to the parties regarding any potential biases, and offer the parties an additional period of time to object to his/her appointment. These administrative issues can be delayed further in cases involving a panel of arbitrators and many parties discover that they can waste two to three months of time on the selection process alone.

Many litigants are also surprised to find that their case progresses much like a standard lawsuit once discovery begins. While arbitration may be an “alternative” to litigation, the reality is that most arbitrators are former judges or well-respected lawyers who have grown accustomed to the litigation process and the structure it provides. In cases where the parties are represented by counsel, the lawyers also tend to gravitate towards the familiar guidelines adopted in the federal or state rules of procedure. The result is that – absent an agreement of the parties – the dispute will likely progress similarly to a traditional lawsuit, with a scheduling order that provides for fact discovery, expert discovery, motion practice, pre-trial disclosures, and an evidentiary hearing.

While it is certainly possible to conduct an arbitration in an expedited manner, most parties find that the arbitrator will simply look for the middle-ground between the parties’ respective scheduling proposals, or perhaps lean towards a lengthier schedule in order to ensure that each side has a full opportunity to develop their case. Accordingly, parties who opt for arbitration may want to include time restraints within their contract’s arbitration clause, including parameters regarding the amount of time permitted for discovery and the estimated length of any evidentiary hearing.

3. Clients Are Still Subject to Burdensome Discovery.Unfortunately, many attorneys and clients find that they are still subjected to the burdens of discovery, even in an alternative dispute resolution forum. Most arbitration clauses do not contain any limits on the scope or amount of discovery that the parties may conduct, and parties often find that the arbitrators will apply the default rules of federal discovery by allowing for the discovery of any information likely to lead to the discovery of admissible evidence. In addition, because arbitration is a private proceeding, adverse litigants will often argue that there is “no harm” in allowing discovery regarding tangential matters since the matter will not be aired in a public forum.

Another complicating factor concerns the availability of third-party discovery in the arbitration forum. While most states have adopted laws that allow arbitrators to issue subpoenas to third-parties, many third-parties will not honor a subpoena issued out of a private arbitration proceeding, particularly if it is issued in another state. Thus, parties who truly need third-party discovery in order to prosecute or defend their claims may find it difficult to obtain their evidence or may incur additional time and expense in order to domesticate and enforce subpoenas against third-parties.

4. Mixed Results are Common.Another common complaint from practitioners and clients is that arbitrators tend to “split the baby.” In particular, clients are often disappointed to find that their arbitrator is reluctant to grant dispositive motions, issue discovery sanctions, or exclude evidence at the hearing. Many practitioners also express complaints regarding their ultimate results, since they may feel like their arbitrator found a way to get to a compromise number as opposed to making a “hard call.”

Like it or not, the reality is that arbitrators are in the business of being hired as arbitrators – they have professional reputations to protect and want to be perceived as fair to both sides so that attorneys will recommend them to others in the community. While there are certainly many qualified arbitrators who are willing to make difficult decisions, all are charged with being neutral and are reluctant to make extreme decisions without having the benefit of hearing all of the evidence. Likewise, most arbitrators are conscious of the fact that one of the few ways they can be reversed is to deny a party a fair hearing.

5. It is Almost Impossible to Successfully Appeal.Finally, and perhaps most importantly, arbitration is generally final. Both the Federal Arbitration Act and the Uniform Arbitration Act (which has been adopted in some form in over 30 states) identify only limited circumstances in which a district court can vacate or modify an arbitrator’s award. These circumstances would require a party to prove that: (1) the award was procured by corruption, fraud, or undue means; (2) there was evident partiality or corruption in the arbitrators; (3) the arbitrators were guilty of misconduct in refusing to postpone the hearing, or in refusing to hear evidence which prejudiced the rights of the parties; or (4) the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 9 U.S.C. §10.

The state and federal courts that have reviewed these issues have been historically deferential to the arbitrator, and have only reversed decisions in the most egregious of circumstances. In addition, because there is frequently no record in an arbitration proceeding (i.e., no court transcript), it can be difficult for the parties to marshal the facts that would support their alleged points of error. A party who wishes to appeal an arbitrator’s decision should also consider that an appeal will most likely require them to enter the arbitration award into the public record, since a state or federal district court will most likely be reviewing the decision.

In short, arbitration can serve a valuable purpose in resolving business disputes, but it should be considered carefully after weighing the advantages and disadvantages of traditional litigation. Parties who intend to arbitrate can best protect themselves by entering into arbitration provisions that define the scope and timing of their proposed dispute resolution process, in order to minimize procedural disputes and delays.